Lessons learned from the pandemic and adaption of business models to diversify supply chain concentration
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June 8, 2022The views and opinions expressed in this article are those of the thought leader and not those of CeFPro.
By Eirini Etoimou, Group Procurement Manager, ODEON & UCI Cinemas
How have organisations business models changed to diversify supply chain concentration as a result of the impacts of the Covid-19 Pandemic?
Definition wise, business models are associated with successful operation of a business, identifying sources of revenue and covering customers’ needs. Well, comparing this with what happened to the supply chains worldwide when COVID erupted, is a great showcase of the antonym of this definition. Products, critical components shortages, disruption and confusion in transportation, cost implications, and sales collapse, were just a few ‘components’ that synthesized the obvious and immediate need for a change. The highly esteemed ‘Just-in-time’, ‘lean’, ‘efficient’, models faced a catholic deconstruction, predominantly because of the business’ persistent neglect of systemic risks from exogenous factors. Lack of visibility, transparency in the supply chains, weak points and price-only-oriented supply agreements, co-starred to this drama unfolded, as we experienced it in all its glory.
This situation suggests that there is no other way: reflect, restructure, and have a more open and flexible approach, including the supply chains and procurement professionals as equal partners within the business ecosystem to support the business plan and continuity during a crisis.
What is some best practice organisations should follow to effectively maintain existing supply chains in the current climate?
The pandemic has undoubtedly created a multifaceted financial and social impact. Supply chains proved to be the Achilles heel of the business ecosystem, and their evaluation towards a more resilient and sustainable model, seems to be more important than ever before. In order to maintain the existing supply chains, business would need to follow some strategic steps:
a. Transparency – transparency should be applicable to all supply chain tiers, identifying the possible weak points, understanding dependencies, and mitigating any possible risks by putting in place alternative solutions
b. Demand / Supply assessment – Smart inventory control (finished goods, spare parts, stock in transit, W/H) and secure a flexible logistics capacity
c. Contracts – check what Force Majeure covers and update accordingly. At the same time, monitor any relevant local/international legal amendments that could impact the contract validity and your rights. Pay close attention to the renewal terms – better to avoid costly renewals.
d. Manage cash & net working capital, conducting stress tests to the supply chains in an effort to identify risks linking to financial implications
b. Demand / Supply assessment – Smart inventory control (finished goods, spare parts, stock in transit, W/H) and secure a flexible logistics capacity
c. Contracts – check what Force Majeure covers and update accordingly. At the same time, monitor any relevant local/international legal amendments that could impact the contract validity and your rights. Pay close attention to the renewal terms – better to avoid costly renewals.
d. Manage cash & net working capital, conducting stress tests to the supply chains in an effort to identify risks linking to financial implications
However, the most important to maintain the existing supply chains is to have an open communication and collaborative mindset to work out with critical suppliers towards sustainable and financially viable solutions. A flexible supply network prevents from disruption during a crisis.
Why is it so important to limit concentration in the supply chain – have there been any lessons learnt in this respect from the pandemic?
During COVID, supply chains have been the Achilles heel of the business ecosystem, showing their significant vulnerability and “betraying” by their collapse a whole efficiency – standardisation, lean, Just-in-time – model. What predominantly and fundamentally exposed was the persistent neglect to systemic risks from exogenous factors. This is quite paradox, considering the availability and access to sophisticated risk assessment tools and the continuous alerts by procurement and supply chain professionals to their internal stakeholders and through market insights about the need to transparency.
There are so many examples from the past (i.e. Toyota, Zara, P&G, a.o.) and more recently with the pandemic, that the lack of concentration has created a significant disruption to the business continuity. Disruptions in China manufacturers have affected almost every industry. Take as an example the cotton that could not be exported for clothes production, laptop components, chemicals for medicines, and so many other products. Even Apple’s supply chain did not remain intact; components shortages in cases and memory chips created delay in releasing latest new iPhone versions.
If there is a lesson in regard to the supply chains is the need to reconsider how flexible and resilient they should be, keeping a balance between efficiency and cost implications.
In your opinion, what is the impact of dependence on low cost production?
Low-cost production has been a significant and fundamental pillar in a number of global supply chains and a way to fight competition and low price customers’ demand. No matter the situation global economy faces, and even if within one night we needed to move from globalisation to regionalisation or even localisation, some things will not change: low prices, competition, and, in some cases, specialisation (i.e. medical chemical ingredients produced only in China and Korea).
In my perspective, the pandemic, yes, it was/is an eye-opener and a great lesson of how different we should face the supply chains. However, at the same time, I am against any extreme reactions and I prefer more ‘calm’ and balanced approaches. Having transparency, investing in more advanced information systems and analytics that will provide accurate predictions about weaknesses in the supply chain; segmenting the supply chain based on demand, volume, variations; risk mitigating and stress testing; all these may provide efficiencies, transparency, taking good advantage of what a low cost production can offer, but at the same time, keeping good monitor and control through alternative solutions in place that will ensure business continuity in case of a disruption without significant cost implication.
What is the greatest lesson you have learned, from the effective Covid-19 has had on business models?
I would say that the pandemic proved to everyone that overestimating a risk may prove to be more cost efficient and lead to better decisions in the long run.
Eirini presented at Global TPRM: Cross Industry, which took place virtually on December 8-9. Click here to view the full event agenda, as well as insights from the event.
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